Choice of Law: New Foundations ANDREW T. GUZMAN* INTRODUCTION .......................................... 884 I. EXISTING CHOICE OF LAW THEORIES ............................ 890 A. VESTED RIGHTS .................................. 890 B. INTEREST ANALYSIS ....... ................................ 892 II. FRAMEWORK ........................................ 894 A. THE PRIMACY OF EFFECTS ............................ 894 B. THE GLOBALLY EFFICIENT POLICY ...................... 898 C. NONCOOPERATIVE NATIONAL BEHAVIOR .................. 899 D. INCORPORATING PUBLIC CHOICE ISSUES .................. 900 III. CHOICE OF LAW LESSONS ............................... 904 A. LESSON #1: THE NONCOOPEARTIVE APPROACH IS INEFFICIENT .... 904 B. LESSON #2: EXTRATERRITORIALITY LEADS TO OVERREGULATION ................................. 906 C. LESSON #3: TERRITORIALITY LEADS TO UNDERREGULATION ..... 909 D. LESSON #4. CONTRACTING FOR CHOICE OF LAW ................ 913 E. LESSON #5: IDENTIFYING INTERESTED JURISDICTIONS ............. 915 F. LESSON #6: THE HARTFORD FIRE CASE IS WRONG ................ 916 G. LESSON #7: THE LOCATION OF THE PARTIES AND DOMICILE TESTS ...... ........................................... 920 H. LESSON #8: THE CONDUCT TEST IS NOT RELEVANT .............. 921 IV. POLICY IMPLICATIONS ................................. 925 * Assistant Professor of Law, University of California at Berkeley School of Law. I owe thanks to Jennifer Arlen, Robert Cooter, Richard Craswell, Stephen Choi, William Dodge, Allen Ferrell, Jesse Fried, Jack Goldsmith, Mitu Gulati, Ehud Kamar, Henna Hill Kay, Daniel Klerman, Larry Kramer, Christopher Kutz, Mark Lemley, Erin O'Hara, Michael Solimine, Paul Stephan, Joel Trachtman, John Yoo, seminar participants at Boalt Hall, Columbia Law School, the University of Chicago Law School, University of Southern California Law School, and Stanford Law School, participants at the American Law and Economics Association Annual Meetings 2000, and participants at the Canadian Law and Economics Meetings 2000. Special thanks to Jeannie Sears and Nicholas James. Melissa Kennedy and Ryan Waterman provided excellent research assistance. HeinOnline -- 90 Geo. L.J. 883 2001-2002 884 THE GEORGETOWN LAW JOURNAL [Vol. 90:883 A. THE PRESUMPTION AGAINST EXTRATERRITORIALITY ............ 925 B. NATIONAL TREATMENT OF FOREIGN PLAINTIFFS ................ 927 C. PRIVATE RIGHTS OF ACTION .......................... 930 V . APPLICATIONS ....................................... 932 A. COOPERATION ON CHOICE OF LAW ...................... 932 B. COOPERATION OF SUBSTANTIVE TOPICS ....................... 933 1. Bankruptcy ................................. 934 2. Securities .................................. 935 3. A ntitrust ................................... 935 . .. C. WHEN ARE INTERNATIONAL INSTITUTIONS NEEDED9 936 CONCLUSION ............................................ 938 INTRODUCTION Growth in international activity and dramatic technological change have greatly increased the frequency with which national legal systems must interact. Most obviously, the Internet allows information to flow across borders without cost and beyond the control of governments. Indeed, even the owner of the information cannot easily prevent it from being received by individuals in foreign countries. That individual, therefore, may find herself and her actions subject to foreign laws. Similarly, a business that operates in several countries is potentially subject to the laws of each. As international activity increases, domestic legal regimes must find a way to work together to regulate that activity in desirable ways. At present, domestic legal systems do a poor job of resolving conflicts amongst themselves. That is, they do not have an effective and efficient choice-of-law system. This is unlikely to change without a better understanding of choice-of-law regimes and their impact on the well being of individuals. Improving our understanding in this area is the goal of this Article. Put differently, this Article seeks to restructure the way in which we think about choice of law.1 To do so, it abandons the traditional and almost universal reliance on notions of sovereignty as a normative justification for choice-of-law 1. Despite the many attempts to improve on this existing approach to choice of law, the field is widely considered to be unsatisfactory. See Lea Brilmayer, Methods and Objectives in the Conflict of Laws: A Challenge, 35 MERCER L. REv. 555, 555 (1984); Larry Lessig, The Zones of Cyberspace, 48 STAN. L. REv. 1403, 1407 (1996); William L. Prosser, Interstate Publication,51 MICH. L. REv. 959, 971 (1953); William L. Reynolds, Legal Process and Choice of Law, 56 MD. L. REv. 1371, 1371 (1997); Kermit Roosevelt m, The Myth of Choice of Law: Rethinking Conflicts, 97 MICH. L. REv. 2448, 2448 (1999); Joel P. Trachtman, Conflict of Laws and Accuracy in the Allocation of Government Responsibil- ity, 26 VAND. J. TRANSNAT'L L. 975, 978 (1994). HeinOnline -- 90 Geo. L.J. 884 2001-2002 2002] CHOICE OF LAW: NEW FOUNDATIONS rules and focuses instead on the welfare of the parties affected by those rules. By focusing on the welfare of individuals, the analysis identifies policies that can lead to a more efficient regulation of cross-border activity and, therefore, the maximization of human welfare. Although the notions of sovereignty that form the basis of traditional choice- of-law scholarship may represent values worth considering, it is striking that choice-of-law scholarship has paid so little attention to how individuals and their behavior are affected by the chosen rules.2 The most accurate characteriza- tion of the sovereignty-based approach may be that it is the product of the long history of choice-of-law scholarship rather than a deliberately chosen frame- work within which to address the regulation of international activity. This approach is difficult to defend from an economic point of view and it suffers from the fact that our notions of sovereignty change rapidly. For example, in the early part of the twentieth century virtually any form of extraterritorial jurisdic- tion was considered an infringement on the sovereignty of other nations, a principle enunciated by the Supreme Court in the famous American Banana case. 3 Today, however, the extraterritorial application of laws is widely accepted and sovereignty issues arise only with the most aggressive attempts to extend jurisdiction, a fact most dramatically evidenced by the adoption of the "effects test" in United States v. Aluminum Co. of America (ALCOA).4 The shifting definition of sovereignty is, therefore, an unstable foundation upon which to build a body of choice-of-law scholarship. When a particular conception of national sovereignty underlies choice of law, the choice-of-law edifice is sure to crumble when different notions of sovereignty are adopted. In the place of the traditional approach, this Article adopts an economic perspective on choice-of-law questions. It begins with the view that the objec- tive of a choice-of-law regime should be to provide a legal ordering that goes as far as possible toward maximizing global welfare. 5 This objective may seem unremarkable to readers familiar with the economic analysis of law, but those familiar with traditional choice-of-law scholarship will recognize that efficiency analysis in general, and law and economics in particular, has, to date, had only a 2. One arguable exception is surveyed in LEA BRILMAYER, CONFLicr OF LAWS 219-63 (2d ed. 1995) (discussing a rights-based approach). 3. Am. Banana Co. v. United Fruit Co., 213 U.S. 347, 357-59 (1909) (adopting a jurisdictional test in which only conduct that occurs within the United States is subject to American antitrust laws). 4. 148 F.2d 416, 444 (2d Cir. 1945) (stating that U.S. antitrust laws reached acts outside the United States "if they were intended to affect imports and did affect them."). The Supreme Court explicitly adopted the ALCOA standard in ContinentalOre Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 704 (1962); see also Steele v. Bulova Watch Co., 344 U.S. 280, 288 (1952) (adopting a similar test with reference to the Lanham Trademark Act, 15 U.S.C. §§ 1051 et seq. (1946)). 5. The maximization of global welfare should be a noncontroversial assumption because the manner in which global welfare is calculated is not specified. The only restriction on the global welfare function is that it must involve some form of aggregation of national welfare functions (which are, themselves, not specified). Thus, for example, if the protection of the environment is an important concern, it can be included as part of the global welfare function simply by including it in appropriate individual welfare functions. HeinOnline -- 90 Geo. L.J. 885 2001-2002 THE GEORGETOWN LAW JOURNAL [Vol. 90:883 minor impact on choice of law.6 The fact that global- welfare represents the objective of the policy analysis, however, does not imply that individual coun- tries will or should pursue that same objective. Indeed, the challenge for choice of law is the fact that nations-the actors in the international arena-typically do not share this or any other common objective. Rather, each country deter- mines its policies based on its own objectives. In contrast to the domestic context, there is no institution authorized to create a comprehensive set of binding rules at the international level. If the globally efficient result is to be achieved, therefore, it is necessary to find a way to align national interests with those of the